28.09.2015Down, down but not different: Australia's supermarkets in a race to the bottom

For 25 years, Woolworths told shoppers they were “the fresh food people”. It was a very clear point of difference and delivered the group a sustainable competitive advantage. Any attempt by a competitor to replicate it would have been dismissed as lacking credence; a simple market-follower strategy.

In contrast, Coles appeared lost and without direction, the result of an ever-changing senior leadership team, until Ian McLeod arrived in 2008. Prior to 2000, Coles was “serving us better”, then in 2002 shoppers were “saving everyday”. In 2004, Coles was “delighting their customer” and then things were getting a “little better … every day”. Finally, the more recent “down, down” campaign has aligned with its “quality food costs less at Coles” slogan, cutting through with shoppers.

At the same time Coles was closing underperforming stores, cutting its range to streamline supply chains, cutting overhead costs and investing heavily in store refurbishments.

The fastest, although not the smartest, way to compete with an aggressive competitor is to replicate; that’s exactly what Woolworths and more recently IGA did. A quick look at Coles', Woolworths' and IGA’s catalogues and stores today illustrates the same deep discounting strategy.

It was clearly an error of judgement for Woolworths to move away from its very successful “fresh food people” position. The “cheap, cheap” campaign confused loyal shoppers and played into the hands of Coles, which was better positioned to deliver on price. With both majors driving a message of “price”, more shoppers also started trailing the German discounter Aldi.

The lowest price doesn’t necessarily win

If you are not a discounter, move away from price. While most supermarkets will carry a range of low-priced, generic private-label products to service the discount-shopper segment, sending the message that you sell groceries “cheap, cheap” and “down, down” every day is risky.

Even Metcash-owned IGA has moved away from its “local” campaign to now promote itself as “the same” as the big two with a recently launched “price match” campaign. Price is easily comparable and replicated, and this has been played out across Australian supermarkets over the last few years.

Internationally, grocery discounters like Lidl and Aldi continue to take market share away from the major full-line supermarkets, while the supermarkets continue to discount heavily. The practice of deep, unsustainable and potentially unprofitable deep discounting has even begun to attract criticism for grocers.

However, while Australian supermarkets and independent grocers continue to focus on price, shoppers will continue to shop between all brands for the lowest; loyalty is lost. This is most evident with Aldi, which in Australia has the lowest customer loyalty at 7%, compared to the majors at 25% and IGA at 30%. Supermarket retailing in Australia has become a race to the bottom.

Fresh – the future fight

Discounters will always win on price. The smart approach to combating this threat is not to position yourself as the same, but different. A focus on what the discounters don’t offer – such as range, value, service and fresh foods – is a much smarter approach.

The price of a litre of milk or a loaf of bread is easily comparable, whereas “fresh” is not. The fresh food component of a supermarket also delivers more profit than dry groceries. Fresh is where the next battle will be fought and won.

Now that Coles has established its position as the provider of low-priced groceries, its next move will be to focus on the “fresh food” space now vacated by Woolworths, which still appears to be cutting prices.

The future of convenience

When shoppers have been conditioned to think about the price they pay each week for a basket of groceries, the franchised grocer model no longer works. Already, experts have suggested that within 10 years Metcash’s independent grocers will no longer feature in the Australian grocery market.

Yet overseas the convenience store model is growing faster than full-line supermarkets. While some of this growth comes from the ability to embed small store footprints into high streets and high-density areas, much of it is the result of major supermarkets moving into this space with their brands: Tesco Metro, Tesco Express, Sainsbury’s Local and Carrefour Metro.

With Roy Morgan’s latest shopper loyalty research illustrating IGA has the most committed shoppers, even with perceived higher prices, IGA would be best to walk away from a price war. If IGA is unable to defend against the growth of Aldi and a re-energised Coles and Woolworths, it is highly probable it will either exit the market or reposition itself upmarket as a premium grocer.

Either way, it is likely that both Woolworths and Coles will look favourably at moving into this space with a chain of Woolworths Metro or Coles Express convenience stores.